Money market funds are open-end mutual funds. They should not be mistaken for money market deposit accounts, which are bank products. The primary difference between money market funds and money market accounts is that money market funds are not FDIC-insured like bank products. 

Money market funds have been in the U.S. since 1971. According to The Associated Press, money market funds now hold about $3.9 trillion in assets.  More investors have turned to these funds considering the record losses the market has experienced. Money market funds try to keep the net asset value (NAV) of the fund at $1 per share; only the yield fluctuates. They are invested in short-term, low-risk securities like Treasury bills, certificates of deposit (CDs) and commercial paper. While these funds do not have the protection of the FDIC, they are considered very low risk and are generally the safest type of mutual fund.

Money market funds are often used to manage cash. Unlike money market accounts, they do not have any restrictions on the amount of transactions per month. Those who have multiple mutual funds with the same investment company, often use money market funds to transfer money between funds or to park cash while waiting to make an investment. Money can also be easily transferred into checking and savings accounts electronically and some funds offer check-writing privileges.

Some money market mutual funds are tax-exempt. These funds are exclusively invested in securities issued by state and local governments. Consequently, interest income is exempt from federal taxation. If an investor invests in a fund that only invests in securities issued by governments in his or her home state, interest income may also be exempt from state and local taxation as well. Tax-exempt funds usually earn lower yields than taxable funds. They mainly appeal to those in high tax brackets.

Because they are mutual funds, money market funds have expenses to operate the fund. The expenses are taken out of the fund’s assets. This reduces the return to the investor. The recent economic crisis has caused some trouble with certain money market funds. Some funds, particularly those invested heavily in Treasury bills, have seen such low yields that expenses have outweighed income causing a negative yield situation. Fund managers have protected investors from this situation by stepping in to purchases troubled securities. This has prevented the funds from “breaking the buck,” or producing a negative return for investors.

Some funds have closed to new investors to prevent having to buy additional securities paying lower yields. Adding these low-paying securities to the fund reduces the overall return for those already invested. Additionally, some funds are reducing or waiving fees to keep the yield propped up longer. Contrarily, some funds are raising fees to offset low yields and cover expenses. Funds that participate in the U.S. Treasury’s Temporary Guarantee Program are protected if the fund breaks the buck. Investors will be reimbursed for losses until April 30, 2009.

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